EchoStar at 25
Innovative marketing and new technology help the satellite service provider
stay competitive.
By Scott Kirsner
Hollywood Reporter
September 15, 2005
http://www.hollywoodreporter.com/thr/television/feature_display.jsp?vnu_content_id=1001137311
The smart money would not have been riding on Charles Ergen and EchoStar
Communications in 1980.
Ergen, a former professional blackjack player, scraped together $60,000
that year with his wife Cantey (a former Braniff flight attendant) and his
friend James DeFranco to buy a satellite-dish franchise that served
Colorado, Utah and Wyoming. While making their first customer delivery, the
trio's dish caught wind like a sail, breaking their trailer loose from a
Lincoln Continental and immobilizing it in a passing lane.
Twenty-five years later, EchoStar is a publicly traded entity with a $13
billion market cap, nine Earth-orbiting satellites and 11.5 million
subscribers to its Dish Network. The Englewood, Colo.-based company
competes ferociously for pay TV customers with cable operators and with
News Corp.'s DirecTV, which boasts 14.7 million subscribers but also
enjoyed a two-year head start in the small-dish arena.
The founders have not yet ridden off into retirement -- Ergen is EchoStar's
chairman and CEO, Cantey sits on the board of directors, and DeFranco is an
executive vp -- but as the company marks its silver anniversary, it faces
fresh competitive crosswinds that could threaten its future growth. Telcos
such as SBC Communications and Verizon are beginning to offer video
alongside their traditional phone and Internet services, and cable
operators are developing "bundles" of services by marketing low-cost
voice-over-Internet telephony.
"I think the competitive front is changing here, and it's changing more in
favor of cable," Kagan Research analyst Derek Baine says.
Other observers cite the difficulty of acquiring and retaining customers
without overspending on marketing and/or on new technology including
digital video recorders.
Beyond the changing marketplace, the biggest questions confronting EchoStar
are whether consumers are gravitating more toward buying bundles of
services and how the company's relationship with SBC will change as SBC
begins to sell its own TV offering, delivered through fiber-optic cable.
SBC once provided a steady source of new customers for EchoStar, selling
Dish Network subscriptions alongside its own telephone and Internet
services. But SBC brought in only 10,000 customers during the second
quarter of 2005, compared with 71,000 during the first quarter of the year.
Some analysts see that as a sign of SBC's waning commitment to EchoStar,
but EchoStar senior vp marketing Jody Martin calls the drop-off a temporary
blip. "Very shortly, you should see a resurgence in their volume," she says.
Adds American Technology Research analyst Rob Sanderson: "SBC has already
been signaling somewhat privately to investors that they need to negotiate
better terms on that deal. Part of the decline was an intentional
backing-off of marketing to try and put a little bit of pressure (on
EchoStar) to help in the negotiation."
Martin does not sound concerned about SBC morphing from a partner into a
rival -- or at least a company that works with EchoStar in some geographic
areas while competing in others -- and notes that the telcos' video
offerings initially will serve only "certain segments of the urban
population." She also does not believe that EchoStar will be hurt by its
inability to bundle video, phone and data services.
"Customers definitely find an appeal in the 'triple play,' but not a triple
play (from a company) that they have historically viewed as a provider of
mediocre service," Martin says. "Not unlike cable providers, telcos are not
universally beloved by their customer base. They have a little bit of an
uphill battle."
But analysts note that providers that can bundle services enjoy tight bonds
with their customers. Leichtman Research Group president Bruce Leichtman
believes that offering discounts to customers who buy video, Internet and
phone service together can be a "glue" for cable companies and telcos.
"Those people are reticent to switch away from cable to satellite because
their high-speed Internet bill would go up by $15 if they wanted to keep
their cable Internet access and sign up with Dish Network," he says.
But EchoStar has found success by offering a unique bundle, packaging a
big-screen high-definition TV set with a high-def receiver and a Dish
Network subscription for about $1,000.
"EchoStar is the only company I've seen doing that," Baine says. "It
answers one of the frustrations for the consumer, which is that HDTV can be
confusing and a big hassle to set up."
Nonetheless, the most recent quarterly financial results for EchoStar and
DirecTV reveal the strains of an increasingly competitive marketplace.
"It's evident that while DirecTV and EchoStar grew, they didn't grow at the
pace they were once growing at," says Starz Entertainment Group executive
vp Ed Huguez, a former DirecTV executive. "EchoStar saw its slowest growth
in the last two years, and DirecTV's was the slowest in the last seven
years." (Ergen attempted to acquire DirecTV in 2002 but was blocked by the
FCC.)
Huguez notes that EchoStar once resembled the Wal-Mart of satellite
television -- targeting cost-conscious customers -- while DirecTV was more
like Saks Fifth Avenue, focusing on high-end customers. But those
distinctions no longer are as sharp.
"DirecTV decided that they needed to try some different things and get more
aggressive with some offers to get that low-end customer," he says.
In response, EchoStar, long known for sassy marketing that antagonizes its
cable competitors, launched a TV advertising campaign this summer which
knocks pay TV providers that "suck" and touts Dish Network as television
that "doesn't suck." That launch was followed by a clever publicity stunt:
an offer to provide 10 years of free satellite service to residents of any
town willing to rename itself Dish.
But ad campaigns can increase the cost of acquiring customers. EchoStar's
per-customer acquisition cost rose from $576 in 2004 to $667 during the
most recently measured quarter, though customer churn decreased and the
company earned about $3 a month more from each subscriber.
Martin believes that equipment also increases customer-acquisition costs.
"When you sell a DVR with a bigger hard drive, that drives up the cost per
sale -- but it also drives up the overall experience for the customer," she
says.
Martin says EchoStar is adjusting to a pace of growth that is different
from any experienced previously by the company.
"For a long part of our history, it has been: 'Holy cow, the faucet's on.
How do we catch it all?'" she says. "Now, marketing plays a larger role,
but there's still a huge amount of potential. I don't see it as 'Game over'
at all; it's just 'Game changed.'"
In addition to increased external competition, EchoStar has grappled with a
host of internal issues of late. In January, a former top executive sued
Ergen for gender discrimination, alleging that she was the target of
"violent yelling fits" and describing the company's corporate culture as
similar to a "boys' club." (The suit was resolved in July.) And in March,
EchoStar's audit committee and the Securities and Exchange Commission
launched a probe into the company's accounting methods. ("EchoStar has
taken remedial action on the issue," spokesman Mark Cicero writes in an
e-mail. "We have no additional comment.")
The SEC probe was followed by a rain of shareholder lawsuits and media
reports which noted that corporate-governance watchdog groups are not among
EchoStar's fans. (Institutional Shareholder Services, among others, is
critical of the company because Ergen controls 91% of shareholder votes
through a separate class of stock and because five of its eight board
members are insiders.) In addition, a court trial pitting EchoStar against
TiVo could begin this fall, with TiVo alleging that EchoStar's DVR
infringes on its patents.
EchoStar's executive ranks also have undergone major renovation this year.
Martin joined the company in May, and the following month EchoStar
recruited Michael Neuman, most recently president of a Canadian
wireless-communications provider, to step in as president and chief
operating officer (the post had been vacant for more than a year).
Also in June, board member Carl Vogel was named to the full-time job of
vice chairman -- Neuman and Vogel report to Ergen -- and last month,
executive vp programming Michael Schwimmer left EchoStar to become CEO of
Si TV, an English-language cable network that targets Latino audiences.
Vogel will help oversee EchoStar's short-term strategy, freeing Ergen to
think more about the big picture.
"I'll be looking at things two and three and four and five years out,"
Ergen said last month during a conference call with analysts. "I don't know
why we as a company didn't start Google or didn't start eBay -- we
certainly were capable of that, but we didn't do it. Part of that is
because the CEO was asleep at the wheel. We really have a chance to do some
things beyond what we're doing today."
But some analysts wonder whether Ergen is still the right person to occupy
EchoStar's corner office after a quarter-century in charge.
"Charlie is the quintessential entrepreneur, but it's a different game
now," Leichtman says. "What he did was think like an entrepreneur, and
we're out of the entrepreneurial phase now."
Adds Carmel Group analyst Jimmy Schaeffler: "It's not as much fun. It has
gone from being a green field to being a walled garden -- which is to say,
the competition has put barriers up almost everywhere they turn."
But Ergen seems to understand that as much as the satellite TV business has
changed since 1980, there are some constants -- like concentrating on the
most-profitable customers without being distracted by competitors. During
EchoStar's most recent Wall Street conference call, he said: "Our job is
not to chase every single home and swim upstream, where we may not have a
competitive advantage -- and the reverse of that is to run really hard
where we do have an advantage. We're picking our spots (and focusing) on
the total package of growth and profitability."
================================
George Antunes, Political Science Dept
University of Houston; Houston, TX 77204
Voice: 713-743-3923 Fax: 713-743-3927
antunes at uh dot edu
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